Value Unleashed

Capital Markets Update

The S&P 500 remained relatively flat this week as uncertainty towards a Federal Reserve Rate increase remains prevalent. Record-low bond yields have pressured public companies to increase dividend distributions, as investors search for alternatives to bond yields. Consumer delinquency rates in Alberta stood at 1.4%, up 40.3% from one year ago due to the fallout from the drop in oil prices according to Equifax Canada.

10-year treasury yields continue to fall as focus shifts to the Fed’s annual symposium next week. New credit issuances remain low, with less than three syndicated deals observed last week.

In addition to strong capital markets liquidity continuing to underpin future M&A activity, corporate cash balances for the equity index constituents as of the end of June were approximately $7.7 trillion, a slight increase from the $7.5 trillion one year earlier.

Valitas Insights: Canadian Industry Fragmentation

In the second installment of Valitas’ Canadian Private Business Landscape Series, our team has conducted further analysis to determine the level of fragmentation within 150 Canadian industries and developed a scoring methodology to rank them. A fragmentation score will help answer a few key questions such as:

• Which industries have the greatest bias toward smaller companies
• Where is there consolidation potential?
• How can we apply this analysis to the Canadian private market landscape?

This Valitas Canadian Private Business Landscape series is focused on presenting a concise summary of the Canadian private business landscape. We will focus primarily on the top 25 primary industries in Canada based on the number of companies with EBITDA greater than $3 million based on our estimation methodology outlined in our prior week’s issue. This series will include the presentation of various relevant metrics, fragmentation analysis, economies of scale insights, and a discussion of which industries are the best candidates for ongoing consolidation.

Part 2: Industry Fragmentation

Valitas has developed a fragmentation score based on the ratio of the total number of companies in a given industry to the median number of companies per industry.  For example, the construction and engineering industry in Canada has 739 companies, versus the median number of companies per industry among all industries of 57.  This is normalized to provide the fragmentation score on a scale between 0 and 1. A score of 1 represents the most fragmented industry and a score of 0 represents the most concentrated industry.

Top 25 Primary Industries by Number of Companies > $3 million EBITDA

 Most Concentrated Industries – Bottom 5 Scores

Many of the most fragmented industries, such as Construction and Engineering or Trading Companies and Distributors have many companies, particularly those falling in the $3-$8 million EBITDA size range. These types of businesses are generally focusing on their local markets with few barriers to entry. Meanwhile, the most concentrated industries, such as REITs, are dominated by a few large players because of capital intensity, barriers to entry and the importance of scale.

However, there are some notable exceptions.  Canada has significant fragmentation in some scale-driven industries such as oil & gas exploration and production, metals and mining and financial services.

The median fragmentation score for the top 25 industries is 0.457 versus a median of 0.076 across all 150 primary industries. It is noteworthy that industries such as Education Services and Healthcare Facilities include many government-owned and funded businesses which will have a direct impact on the level of fragmentation. Ultimately, the fragmentation score is fundamental to determining the consolidation potential in each industry.  However, in isolation, it falls short in determining whether further consolidation potential exists. 

Many industries remain highly fragmented for good reason. Those who have tried to consolidate these industries have destroyed a lot of value in their attempts to do so.  Why?  Because size has to be an advantage in a given industry for consolidation to create value.  This is not always the case.

To assess the importance of size in a given industry, we developed a scoring system to measure the extent to which economies of scale are evident for each industry. Over time, we will periodically update the analysis and discuss trends.  The analysis was created using data from the summer of 2015.

We also conducted a more granular analysis of industry composition, including the breakdown of public and private and independently-owned, operating subsidiary, and sponsor-backed companies.

These will be discussed over the coming weeks. Stay tuned.

Weekly Canadian Private Market M&A Report

Announced Deals

Patricia Industries to Acquire Laborie Medical Technologies

Patricia Industries AB, an Investor AB backed company based in Sweden that makes control investments in companies with strong market positions, brands and corporate cultures within industries positioned for secular growth, has agreed to acquire Laborie Medical Technologies Incorporated, an Audax Group and BMO Capital Partners backed company that engages in the development, manufacture, and marketing of medical devices and disposables in urology, gynecology, and colorectal fields for the diagnostic and treatment of lower urinary tract dysfunctions, fecal incontinence, pelvic organ prolapse, pain, and other pelvic floor disorders. Transaction terms were not released.

Brazil Resources to Acquire Sunward Resources

Brazil Resources Incorporated (TSXV:BRI), a Canadian based exploration stage company that engages in the acquisition, exploration, and development of mineral properties in Brazil, the United States, Canada, and Paraguay, has agreed to acquire Sunward Resources Limited, a Canadian company that is engaged in the acquisition, exploration, and development of mineral resource properties in Colombia. The total transaction value of the deal is estimated to be $11 million.

Babcock & Wilcox Canada to Acquire GE Hitachi Nuclear Energy Canada

Babcock & Wilcox Canada, Limited., a Canadian manufacturer that designs and manufactures fossil utility boilers and nuclear steam generators, has agreed to acquire GE Hitachi Nuclear Energy Canada Incorporated, a Canadian nuclear energy company that engages in R&D, design, manufacturing, construction, test runs, operation and system maintenance of light-water reactors, fast-breeder reactors, nuclear fuel cycle systems, and uranium mining. Transaction terms were not released.

Hempler Foods Group to Acquire Fletcher's Fine Foods

Hempler Foods Group LLC, an American company that produces and distributes meat products has agreed to acquire Fletcher's Fine Foods Limited, an American company owned by Sofina Foods Incorporated that offers a line of protein products for retail and foodservice customers. The total transaction value of the deal is estimated to be $6 million.

Hydro One to Acquire Orillia Power

Hydro One Limited (TSX:H), a Canadian energy company that operates as an electrical transmission and distribution utility in Ontario, has agreed to acquire Orillia Power Corporation, a Canadian energy provider that generates and distributes power for Orillia, Ontario. The total transaction value is estimated to be $41 million.

Kimberley Overseas to Acquire Action Mining

Kimberley Overseas Ltd., a Canadian company, has agreed to acquire Action Mining Limited, a Pala Investment Limited  backed company that explores and develops a zircon deposit in Madagascar. The total transaction value is estimated to be $0.54 million.

Closed Deals

Entertainment One Acquires Secret Location

Entertainment One Limited (LSE:ETO), a Canadian media business that focuses on the acquisition, production, and distribution of television, family, film, and music content rights across various media worldwide, has acquired Secret Location Incorporated, a Canadian company that operates as an interactive agency that develops experiences to connect clients with audiences. The total transaction value is estimated to be $7 million.

Sigma Group Acquires Aimia

Sigma Group, a Canadian diversified holdings company with diverse business interests, has acquired Aimia Incorporated, now Sigma Loyalty Group, a Canadian business that provides marketing and enhancement services, products, and programs for industries including financial services, insurance, retail, and telecommunications. Transaction terms were not released.

BioPharma Services Acquires Bioanalytical Laboratory Services

BioPharma Services Incorporated, a Canadian contract research organization that conducts clinical research trials for pharmaceutical, biotechnology, and medical device companies globally, has acquired Bioanalytical Laboratory Services, a Canadian-based leading research partner of generic, pharmaceutical and biotechnology companies specializing in method development, method validation and the analysis of biological samples for pre-clinical and clinical drug trials (BA/BE studies). Transaction terms were not released.

Hexagon Acquires Multivista Systems

Hexagon AB (OM:HEXA B), a Swedish company that provides integrated design, measurement, and visualization technologies worldwide, has acquired Multivista Systems LLC, a Canadian documentation technology that provides construction documentation photography, video documentation, and Webcam services to construction professionals in Canada and internationally. Transaction terms were not released.

FirstService Corporation Acquires Paul Davis Restoration of Fairfield and Westchester Counties FirstService Corporation (TSX:FSV), a Canadian company that provides property services to residential and commercial customers in the United States and Canada, has acquired Paul Davis Restoration of Fairfield and Westchester Counties, an American company that provides services to repair and clean up damage to institutional, commercial, and residential properties due to storm, water, mold, fire, and other disasters. Transaction terms were not released.